SEC Collects Thousands of Private Messages from Over a Dozen Investment Companies

SEC collects Wall Street’s private messages as WhatsApp probe escalates

The U.S. securities regulator has collected thousands of staff messages from more than a dozen major investment companies, escalating its probe into Wall Street’s use of private messaging apps, said four people with direct knowledge of the matter.

Previously, the Securities and Exchange Commission (SEC) had asked the companies to internally review the messages in its investigation of Wall Street’s use of WhatsApp, Signal and other unapproved messaging apps to discuss work.

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While Reuters and other media have reported that the SEC’s “off-channel” communication probe has expanded to investment advisers, its move to review thousands of their staff messages has not previously been reported. It marks an escalation of the investigation and raises the stakes for the companies and the executives concerned by exposing their conduct to SEC scrutiny.

Deutsche Bank Subsidiary DWS to Pay $25 Million for Anti-Money Laundering Violations and Misstatements Regarding ESG Investments

The Securities and Exchange Commission today charged registered investment adviser DWS Investment Management Americas Inc. (DIMA or DWS), a subsidiary of Deutsche Bank AG, in two separate enforcement actions, one addressing its failure to develop a mutual fund Anti-Money Laundering (AML) program, and the other concerning misstatements regarding its Environmental, Social, and Governance (ESG) investment process. To settle the charges, DIMA agreed to pay a total of $25 million in penalties.

In the AML action, the SEC’s order finds that DIMA caused mutual funds it advised to fail to develop and implement a reasonably designed AML program to comply with the Bank Secrecy Act and applicable Financial Crimes Enforcement Network regulations. The order also finds that DIMA caused such mutual funds’ failure to adopt and implement policies and procedures reasonably designed to detect activities indicative of money laundering and to conduct AML training specific to the mutual funds’ business.

Goldman to Pay SEC $6 Million in Penalties for Providing Deficient Blue Sheet Data

The Securities and Exchange Commission today announced settled charges against Goldman Sachs & Co. LLC for failing to provide complete and accurate securities trading information, known as blue sheet data, to the SEC. Goldman agreed to pay a $6 million penalty to resolve the SEC’s charges.

According to the SEC’s order, over a period of approximately ten years, Goldman made more than 22,000 deficient blue sheet submissions to the SEC. The order finds that, as a result of 43 different types of errors, these submissions contained missing or inaccurate trade data for at least 163 million transactions. The order further finds that Goldman lacked adequate processes to verify the accuracy of its electronic blue sheet submissions.

SEC Charges Citadel Securities for Violating Order Marking Requirements of Short Sale Regulations

The Securities and Exchange Commission today announced settled charges against broker-dealer Citadel Securities LLC for violating a provision of Regulation SHO, the regulatory framework designed to address abusive short selling practices, which requires broker-dealers to mark sale orders as long, short, or short exempt. These records are routinely used by regulators in policing prohibited short selling activity. To settle the SEC’s charges, Miami-based Citadel Securities agreed to pay a $7 million penalty.

According to the SEC’s order, for a five-year period, it is estimated that Citadel Securities incorrectly marked millions of orders, inaccurately denoting that certain short sales were long sales and vice versa. The SEC’s order finds that the inaccurate marks resulted from a coding error in Citadel Securities’s automated trading system and that the firm provided the inaccurate data to regulators, including the SEC during this period.

Top New York State Crypto Regulator to Depart

The head of the virtual currency unit at the New York State Department of Financial Services is leaving the agency.

Peter Marton, who joined the New York financial regulator in late 2021 as the deputy superintendent of virtual currency, will depart at the end of the month. Marton will move to the private sector to work at an entity not regulated by the NYDFS, according to a spokeswoman for the agency.

Sam Bankman-Fried (Probably) Won’t Get a 115-Year Prison Sentence

Before the judge gets to sentencing, the U.S. Probation and Pretrial Services System will create a recommendation. They may look at the trial transcript and Bankman-Fried’s background, and may potentially interview Bankman-Fried himself.

That recommendation will go to the judge, and the defense and prosecution will each provide their own recommendations.

Several lawyers CoinDesk spoke to said that Bankman-Fried – if convicted – could spend 10 to 20 years or so in prison, given the severity of the crimes and the estimated losses. Of course, Judge Kaplan has broad discretion, and he will ultimately set the final sentence.

California Enacts Far-Reaching Climate-Related Disclosure Requirements

While there are many things to worry about for companies required to make disclosure pursuant to these new requirements, one particular concern I have with respect to the new requirements is that the company disclosures (or omissions) could create heightened litigation risks. For starters, any disclosure requirement creates a context within which disclosure or omissions can be alleged to be misleading or deceptive. The obligation for companies to disclose their financial risk associated with climate change also creates a context within which companies experiencing setbacks owing to, for example, extreme weather events, could be subject to hindsight claims that prior disclosures failed adequately to disclose the risks the company faced.

Another risk arises from the fact that companies may face a natural tendency to want to try to put the best face on companies’ GHG status and progress. The possibility for litigation arises out of these kinds of circumstances is not just theoretical; as noted here, this past summer Delta Airlines was sued a securities lawsuit by a shareholder in a class action lawsuit alleging that the company’s claims of “carbon neutrality” were false and misleading.

SEC Charges Private Equity Fund Adviser American Infrastructure Funds for Breaching Its Duties

The Securities and Exchange Commission today announced that American Infrastructure Funds LLC (AIM), a Foster City, California-based registered investment adviser to private funds, agreed to pay more than $1.6 million to settle charges resulting from its acceleration of portfolio company monitoring fees, for transferring a private fund asset from funds nearing the end of their term to a new fund, and for loaning money from one private fund to another private fund advised by an affiliate.

According to the SEC’s order, AIM breached its fiduciary duty to private funds that it advised by failing to adequately disclose its conflict of interest in receiving accelerated monitoring fees paid by a portfolio company when that portfolio company was sold. The SEC’s order also finds that AIM violated its duty of care by failing to consider whether the fee acceleration was in its clients’ best interest. Additionally, according to the SEC’s order, AIM breached its fiduciary duty by transferring certain expiring funds’ assets to a new private fund it also advised and, by doing so, locked up investor money for at least an additional decade without obtaining investor consent, without providing existing investors an option to exit, and without disclosing AIM’s conflicts of interest in the transaction. The SEC’s order finds that AIM also breached its fiduciary duty by not adequately disclosing its conflict of interest when it loaned money from one private fund it managed to a new private fund managed by an affiliated adviser and by failing to undertake a process to determine if the loan was in its clients’ best interest.

Shutdown Threatens to Undercut SEC’s Momentum on ESG Oversight

Congress has about a week left to negotiate a deal to keep the SEC and other agencies working after Sept. 30.

The last government shutdown from December 2018 to January 2019 hobbled the SEC. Only 122, or 3%, of the agency’s 4,418 employees at the time, worked full time during the shutdown, according to a Bloomberg Law analysis. Another 750, or 17%, assisted part time.

The SEC’s Enforcement Division had the most staff working. The agency’s Division of Corporation Finance, which drafts disclosure rules for companies, had only one full-time employee—its director.

Gensler said the SEC will get by the best it can with a skeletal staff if there’s another shutdown starting Oct. 1.

“I’ll be coming in,” Gensler said. “There’s a few of us that will come in.”